26.09.2015

Loans complete purchase of engineering company

A Head of Sixth Form told pupils applying to university that if they weren’t good enough to read maths or physics, they could always ‘do’ engineering. That was entirely the wrong message based on a lack of understanding of the role that engineering plays in our economy.

As that attitude has prevailed since the 1940s, it is perhaps not surprising that ‘engineering’ is the Cinderella sector of the economy. It is partly a question of perception. If an engineering company builds world-beating Formula One cars, it is in ‘motor sport’: if it builds wing sections for a Boeing 787, it is in ‘aeronautics’. Which leaves ‘engineering’ as the catch-all description for the many thousand specialist operations who do an outstanding job solving what are often highly technical problems for companies many times their size.

Small engineering companies are vulnerable to sudden changes in the world economy. While that is true of all sectors, they have less influence over their destiny than larger businesses. Rarely the principal contractors in a project, their fortunes rest on the ability of suppliers further up the economic chain to generate new business in difficult times.

Succession is a problem for many small engineers

But they have the additional disadvantage of succession. It is rare for there to be family members waiting in the wings for the current owner to drive off into the sunset. No doubt the owners’ younger relations would have been dissuaded from engineering as a profession while at school, so the only ways ahead are to wind down the business – with loss of hard-won skills and employment – or sell it as a going concern to a like-minded entrepreneur.

Funding the purchase of a traditional engineering company can prove incredibly difficult. Bankers do not have the specialist skills to understand why a purchaser looking for funds is keen to acquire such a business. It is likely to be assessed unfavourably in terms of its balance sheet: what is the ‘comfort’ in a cherished 40-year old lathe or the stock of copper bars in the workshop?

If the evaluation focuses on what the prospective owner can do with the business going forward – the strength of its order book is one indication – the deal can be attractive to alternative finance specialists like the Trade & Export Finance (TAEFL) group.

TAEFL was approached recently by the team looking to purchase an SME engineering company which had been set up more than 30 years ago by its owner. It was a specialist operation with a strong reputation for innovative solutions and was a key sub-contractor to at least one vehicle engine builder.

With retirement approaching, and the need to extract the benefits of three decades of hard work, the owner was relieved to find a company prepared to acquire the business and its assets. Negotiations to match his expectations with what was on the table from interested parties were tough, but a deal was struck.

Funds required to complete purchase

The stumbling block was that the purchaser needed additional funding to complete the deal. TAEFL draws on an array of solutions to match the funding profile of its clients. With a shortfall of  £180,000, the acquiring company needed a medium-term loan rather than an equity investor or funding for orders at that stage.

Peer-to-peer lending was identified as the most appropriate mechanism for the greater part of the amount required (£50,000 was sourced from the regional BCRS Business Loans organisation). In its capacity as sponsor to lending platforms, TAEFL undertook a comprehensive analysis of the business, its prospects, and the borrower.

Reaction to the deal was supportive on the selected platform given that peer-to-peer lenders are more cautious about the propositions they are prepared to support. Securing offers of funding from those lenders is only the first part of the process. Legal contracts have to be set in place along with adequate security (personal guarantees and charges over assets, for example) for the cohort of lenders prepared to provide the funds. That is where TAEFL provides logistical support to ensure that the process is completed quickly but correctly.

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